Institutional top of mind | #8

Are we heading into Altcoin season?

Keep up with the top industry updates as we present bi-weekly market insights that are important to traders in the institutional space. In this week's edition, Kelvin Lam, CFA, Head of Institutional Research for OKX, looks at various market indicators and the overall market environment to assess the likelihood of an altcoin season on the horizon. Additionally, we explore key considerations that can guide participation in this potential altcoin rally.

Market backdrop

• Bitcoin has maintained its leading position in the Crypto Market for the first 10 months of the year, driven by the anticipation of Bitcoin spot ETF approval, and it functions as "digital gold" during times of heightened geopolitical uncertainty.* Starting the year with a market dominance ratio of 41.9%, Bitcoin's dominance has risen to 53.9% by the end of October, according to data by Tradingview. As we highlighted in our previous edition of Institutional Top of Mind on Oct 10th, the market has played out as expected, exhibiting a strong October performance and a resurgence in stablecoin activity. With the recent drop in the 10-year treasury yield and improved financial conditions since late October**, we have witnessed not only Bitcoin rising in tandem with the stock market but also notable altcoins delivering double-digit daily returns, a phenomenon not seen in a while. The recent market dynamics have prompted a pertinent question regarding the potential emergence of an altcoin season in this current market cycle. While there are early signs indicating the beginning of an altcoin season, we're still a considerable distance away from witnessing a repeat of the altcoin season in 2021.

*Source: Bloomberg, November 1, 2023

**Source: Reuters, November 9, 2023

Assessing market indicators: are we still far from an altcoin rally?

• In assessing the potential for a sustainable altcoin rally, it's crucial to consider the overall sentiment of the Crypto Market. According to Glassnode*, the Crypto Fear & Greed Index has surpassed 50, reaching the "Greed Level" with a reading of 73. While this is the highest level seen this year, it remains significantly lower than the period between October 2020 and April 2021 when the index consistently exceeded 75, indicating "Extreme Greed." Turning to the macroeconomic landscape, the US 10-year Treasury yield has declined by approximately 60 basis points over the past month. Traders have already begun speculating on potential rate cuts by the Federal Reserve next year, as reported by Bloomberg**. However, the outcome and future interest rate trajectory remain highly uncertain, with the Federal Reserve reiterating that their decisions are contingent on incoming data. Therefore, it's important to note that recent risk-on sentiment may be short-lived, and that it might be premature to anticipate entering a quantitative easing phase. From a fund flow perspective, there are initial positive signs for altcoins. Ethereum, for instance, has experienced the largest weekly inflow since August 2022. Additionally, there have been pockets of inflows into altcoins such as Chainlink, Polygon, and Cardano, implying growing interest in these assets according to data by Coinshares.***

*Source: Glassnode, November 16, 2023

**Source: Bloomberg, November 3, 2023

***Source: Coinshares, November 13, 2023

Altcoins' Google trend signals the potential onset of an Altcoin rally

• Historically, the price rally and actions of altcoins have been closely tied to retail and mass participation. To gauge this correlation, we've employed Google Trends data using the search term "altcoins" as a proxy. Furthermore, we have used the inverse of BTC market cap dominance% as a measure of altcoin rally (i.e., the lower the BTC dominance% is, the stronger the altcoin rally). Observing the chart below, we note that the search frequency for altcoins began a significant uptrend in late 2020, roughly two months ahead of the altcoin rally. The search trend reached its peak on May 3rd, 2021, coinciding with the end of the altcoin rally. Similar patterns were observed in May-August 2020 and August-November 2022. Currently, this indicator is displaying an early sign of an altcoin rally, as the Google Trends data for altcoins has recently surged to a 20-month high. If this trend continues, it's likely that we'll witness a sustainable rally in altcoins, or conversely, a decline if the trend reverses.

Source: Google, Tradingview

Key factors to consider for participating in a potential Altcoin rally

• As the possibility of an altcoin rally looms, it's crucial to remain vigilant and consider three key factors that could impact participation in this potential rally.

• Valuation and tokenomics - It's important to carefully evaluate the valuation and tokenomics of altcoins. Some popular tokens that exhibited strong performance in previous altcoin rallies may have unsustainable valuations, high token inflation rates, and significant unlocks scheduled in the near future. These factors can create selling pressure and pose challenges to the price stability of altcoins.

• Institutional access - While the recent Crypto Market rally has been driven by anticipation of a potential Bitcoin spot ETF approval, the accessibility of altcoins for institutional traders remains uncertain. The ability of altcoins to provide real-world utility and offer accessible avenues for traditional institutions will play a crucial role in determining their price performance. It's important to assess the viability of altcoins as investment options for institutional traders.

• Regulatory headwinds - Regulatory headwinds can significantly impact altcoins. For instance, in June 2023, the SEC identified 19 tokens (altcoins) as unregistered securities, leading to their delisting from major trading platforms and subsequent price declines, as reported by Bloomberg*. Similarly, other regions, such as Hong Kong, have stringent requirements for token listings, as outlined in the Guidelines for Virtual Asset Trading Platform Operators by the SFC.** Monitoring regulatory developments and understanding the compliance landscape is essential to navigate potential regulatory challenges that might impact altcoin Trading activity.

*Source: Bloomberg, June 13, 2023

**Source: SFC, June 2023